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Inflation could be worry if VAT jumps to 10% next year, experts say

Business reporters
The Nation July 19, 2014 1:00 am

A woman shops at an outlet of a major retailer.

A rise in the value-added tax (VAT) to 10 per cent, scheduled to go into effect next year, has given rise to worries about inflation getting worse.

Revenue Department director-general Prasong Poontaneat said his agency stood to garner Bt201 billion more in tax revenue if VAT was increased to 10 per cent. However, the burden would be on consumers, who would end up paying more for goods and services.

These comments came after the National Council for Peace and Order (NCPO) announced that it would maintain VAT at 7 per cent for a year from October 1, 2014, to September 30, 2015, after which it would be increased to 10 per cent.

VAT is added to a product's price at every stage until it lands in the hands of the consumer, who pays the final tax. It was implemented in 1992 to replace the business tax. By law, consumers are required to pay 10 per cent VAT, but it was reduced to 7 per cent since March 1998 after the financial crisis kicked in. Several governments have maintained it at this rate for many years.

Benjarong Suwankiri, first vice president and team head of TMB Analytics at TMB Bank, told Nation TV yesterday that the plan to increase the VAT rate did not surprise him, though he was not sure the economy was strong enough to handle a jump to 10 per cent all at once. He suggested the rate should instead be gradually increased at 1 percentage point at a time.

The country has learned that every time consumption was expedited, a slowdown followed, he said.

The order somewhat caused confusion, as the NCPO stated that the VAT would be reduced to 6.3 per cent from the current rate of 7 per cent "to boost domestic consumption and economic growth" while the rate from October 2015 would be 9 per cent. The figures excluded local taxes of 0.7 per cent and 1 per cent, respectively, which would make the final VAT rate to 7 per cent and 10 per cent.

Federation of Thai Industries chairman Supant Mongkolsuthree yesterday refused to comment on the impact of the order, saying that the figures were confusing.

Charl Kengchon, managing director of Kasikorn Research Centre, said: "The NCPO has sent a strong signal to consumers and businesses that it wants to carry on [stimulating] the economy in the second half of this year, as the economic figures in the first half did not show the recovery that was expected."

KResearch said the NCPO had allowed one year for people and businesses to prepare for the VAT increase, which should mitigate the shock to their spending power.

He pointed to Japan, which raised its consumption-tax rate in April. Japanese people stocked up with goods before the VAT hike, which spurred the flow of cash into the economy.

In Thailand, however, when the VAT rate jumps to 10 per cent, inflation will become a worry. But if the increase goes into effect in the fourth quarter of 2015, the inflation should not be seen until 2016.

GDP growth

"Based on the assumption of GDP growth at 4-5 per cent, the VAT hike next year is unlikely to have an impact on consumption," said Charl, adding that moreover, the Finance Ministry planned to adjust tax structures including tax deductions for some items to reduce the burden on individuals.

Commerce Ministry permanent secretary Chutima Bunyapraphasara believes that the rise in VAT will be made when the country's economy is strong.

"With a growing economy, Thai consumers should be able to shoulder a higher cost of living," she said.

Somchai Pornrattanacharoen, president of the Thai Wholesaling and Retailing Association, said the prices of goods and services would definitely rise after the VAT rate goes up, but it was too early to tell how much.